He­li­copter money might be closer than you think

The Pak Banker - - OPINION - Mark Gil­bert

CEN­TRAL bankers, it may soon be time to don your fly­ing suits and start your en­gines. There's a grow­ing sus­pi­cion that quan­ti­ta­tive eas­ing and zero/neg­a­tive in­ter­est rates have lost any power they might have had to kick­start the econ­omy. So Mil­ton Fried­man's fa­mous "he­li­copter money" is back on the radar as a po­ten­tial so­lu­tion to what ails global growth.

With gov­ern­ments still un­will­ing to flex their fis­cal mus­cles to boost the world econ­omy, Fried­man's idea -- easy to ar­tic­u­late, dev­il­ishly hard to en­vis­age in prac­tice -- is very much in vogue. Here's how he de­scribed it in "The Op­ti­mum Quan­tity of Money," a col­lec­tion of pa­pers pub­lished in 1969:

Let us sup­pose now that one day a he­li­copter flies over this com­mu­nity and drops an ad­di­tional $1,000 in bills from the sky, which is, of course, hastily col­lected by mem­bers of the com­mu­nity.

The hope would be that putting more money di­rectly into con­sumers' pock­ets would send them scur­ry­ing to the shops to spend their wind­falls. The en­su­ing surge in de­mand would re­vi­tal­ize an­i­mal spir­its, avert­ing the threat of de­fla­tion by per­suad­ing re­tail­ers to raise their prices. In­fla­tion rates would make their way back to the 2 per­cent tar­gets many coun­tries have adopted as a safe pace of ac­cel­er­a­tion for con­sumer prices. In prac­tice, a cen­tral bank wish­ing to drop money on its con­stituents would prob­a­bly ei­ther just add money to their bank ac­counts, or move in tan­dem with the govern­ment to fund a na­tional tax cut. We'd all wake up a bit richer on a Mon­day morn­ing.

Fried­man ap­pended an im­por­tant caveat to his thought ex­per­i­ment: "Let us sup­pose fur­ther that ev­ery­one is con­vinced that this is a unique event which will never be re­peated." The truth is no-one would re­gard a he­li­copter drop as a one-time event. Once the whirly­birds are in the air, they'd likely fly again and again. More­over, if the money drops had the de­sired ef­fect of re­viv­ing in­fla­tion, it's en­tirely un­clear how you'd go about tak­ing stim­u­lus back out of the econ­omy if prices spiral dan­ger­ously higher.

So this sounds like a crazy plan, right? So did quan­ti­ta­tive eas­ing and neg­a­tive in­ter­est rates un­til the very re­cent past. As Jim Reid at Deutsche Bank has ar­gued, a com­pelling fea­ture of the post-cri­sis en­vi­ron­ment is how quickly rad­i­cal­ism be­comes or­tho­doxy. Put an­other way, des­per­ate times tempt des­per­ate cen­tral bankers into des­per­ate mea­sures:

Through­out the mod­ern his­tory of mon­e­tary eco­nom­ics one pol­icy has been put for­ward as a mon­e­tary "su­per drug" (or deadly poi­son de­pend­ing on your view). That is "he­li­copter money."

It has long been seen as be­ing too pow­er­ful to con­trol and thus be­yond the scope of con­tem­pla­tion. How­ever in the past decade such pol­icy has slowly emerged from the shadow of het­ero­doxy.

Reid wrote that way back in Septem­ber 2013, when the hopes of the world still be­lieved in quan­ti­ta­tive eas­ing as a cure for de­fla­tion. Af­ter all, Ben Ber­nanke had as­sured us in 2002 that the ex­is­tence of the print­ing press meant "a de­ter­mined govern­ment can al­ways gen­er­ate higher spend­ing and hence pos­i­tive in­fla­tion."

Tril­lions of dol­lars of QE later, and it's not so clear that Ber­nanke's as­ser­tion that "suffi- cient in­jec­tions of money al­ways re­verse a de­fla­tion."

Take for ex­am­ple this chart show­ing what's hap­pen­ing to in­fla­tion in the euro zone, based on fig­ures re­leased on Mon­day: Con­cern that the de­fla­tion de­mon is still lurk­ing ex­plains why he­li­copter money -- an idea that's al­most half a cen­tury old and has never been at­tempted -- is the sub­ject of blog post­ings from se­ri­ous mar­ket watch­ers in­clud­ing No­bel prize win­ning econ­o­mist Paul Krug­man, for­mer Bank of Eng­land econ­o­mist Tony Yates, and for­mer chair­man of the U.K. Fi­nan­cial Ser­vices Au­thor­ity Adair Turner.

While the list of ob­jec­tions to the idea of he­li­copter money is a long one -- as de­lin­eated in an ar­ti­cle last week by Bloomberg View con­trib­u­tor Jean-Michel Paul -- the Alice-in­Won­der­land world we cur­rently live in means no pol­icy is too out­landish to con­tem­plate.

Bank of Ja­pan gov­er­nor Haruhiko Kuroda said on Mon­day he's op­posed to he­li­copter money and would never coun­te­nance print­ing money to fund ei­ther the govern­ment deficit or to fi­nance pub­lic spend­ing. To para­phrase from Ham­let, the cen­tral banker doth protest too much, me­thinks.

The fact that he­li­copter money is be­ing dis­cussed at all should be fair warn­ing that the whirly­birds are warm­ing up. And, let's be hon­est, any cen­tral banker look­ing out at the eco­nomic hori­zon must be close enough to de­spair to feel that some­thing, any­thing, ev­ery­thing, is worth a shot now.



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